The singlemost important goal for every Chinese company that decided to become publicly traded in the U.S. was to obtain a listing on a senior exchange, NASDAQ or NYSE / NYSE Amex. The reason that many companies chose a reverse merger as their method of going public was that it was much faster and significantly cheaper than a traditional IPO. And many of those reverse merger companies succeeded in getting their stock listed on a senior exchange within a few years.

This listing comes with a number of benefits. First of all it is much cheaper to raise capital when the stock is no longer just quoted on the bulletin boards. And raising capital is a primary reason for going public also for Chinese companies. Secondly this listing creates a liquid market outside of the PRC for Chinese shareholders, and in China money, personal wealth, and with it status is of prime importance, not comparable with Europe or the U.S.

That leads to the third, and probably most important reason for going public in the U.S.: recognition and prestige for the company and its officials. Being a U.S. public company with a NASDAQ or NYSE listing leads to prestige with both customers and suppliers, but also local banks and government. The good will of especially banks and local government officials is extremely important for a small Chinese company. In a country where success in business is largely based on networking and guanxi, status and prestige are invaluable assets for a young company.

But it also means that a delisting notice from NASDAQ or NYSE comes with great embarrassment for the company. In most cases not only the stock price will collapse, but the repercussions for the company's business in China could be severe if it loses that good will from banks and influential officials in the local government administrations. A Chinese company with a delisting notice will always pull all strings possible to maintain their senior exchange listing, not for the best of its foreign shareholders but for their very own survival.

There is no such thing as a "voluntary delisting" from a Chinese company. If you read such a phrase, stay away from the stock. A company that had its stock delisted without much of a fight is either a fraud or it has given up on its public status, in both cases you don't want to touch the stock.

We have seen more than 50 Chinese delistings over the past two years, and with very few exceptions all those companies were frauds or they have now stopped filing reports with the SEC for other reasons. Only the handful of companies that stayed current in filing its Form 10Qs and 10Ks at all times since the delisting are worth a second look.

We have identified 24 additional Chinese companies that have already received a delisting notice from their exchange or will likely get such a letter in the near future. Those companies will have their common stock delisted within the next six months unless they take immediate action, usually a reverse stock split (approved by the exchange) will do the trick of getting their stock price above the crucial one dollar level.

Some companies have already completed a reverse split, including Cleantech Solutions International (CLNT, 1:10 Reverse Split on 2012-03-06), China Precision Steel (CPSL, 1:12 Reverse Split on 2012-08-28), and China Information Technology (CNIT, 1:2 Reverse Split on 2012-03-02). Even though the stock price usually suffers even more after a reverse split, this is actually a good sign as the company decided not to give up on its senior exchange listing. Again, any Chinese stock that was delisted for violating the $1 minimum bid price rule without the company fiercly fighting for its survival on NASDAQ or NYSE should be avoided no matter what.

NYSE Amex does not have a $1 Minimum Bid Price Rule, yet their regulations state that they can delist a stock when "the aggregate market value of the security has become so reduced as to make further dealings on the Exchange inadvisable." It should also be noted that NYSE Amex recently amended its listing regulations to include several paragraphs about reverse merger companies which now have increased initial listing requirements. Given the large number of Chinese RTO blow-ups on NYSE Amex over the last two years we see the following eight Chinese small caps at risk duet to their low stock price:

14 Comments:

Very good point. Most people do not realize that a big part of the reason why Chinese companies wish to list in the US is for their businesses in China. Losing that listing is a severe loss of face and shows that something is not right with their company.

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